<b>T N Ninan:</b> Robbing Peter to pay banks

To revive mismanaged banks, govt may pick the easiest option: take more of the taxpayer's money and give it to them

When the first lot of 14 banks was nationalised in 1969, one of the things said in those heady times filled with socialist fervour was that, with the banks’ resources at the government’s disposal, it might even be able to abolish the income tax. No one thought then that money would flow the other way: your tax money would be used by the government to finance mismanaged banks…because they finance businessmen who then don’t repay the loans. So who exactly is laughing all the way to (or from) the bank? Perhaps there is a need for some anger here. But who do we get angry with? The government (who is the shareholder on our behalf)? The regulator, which is the Reserve Bank? Bank managements? Bank employees’ trade unions? Those who took the money and became rich while defaulting? Or all of them? 

 

The skeletons are coming tumbling out just now because RBI has woken up to insist that banks prepare proper accounts. But what was RBI doing these many years when it knowingly allowed banks to present fictional accounts quarter after quarter? We suspected the truth because every time a new chief executive took charge, loan write-offs would suddenly mount for the preceding quarter. Also, the market knew the truth--or government banks would not have been quoting well below their book value all this time. Indeed 19 of 24 listed government banks stocks now quote at less than half of book value, some at a discount of 75 per cent. Clearly, investors still think these banks’ books are akin to fiction. 

What about the government, which has been appointing all the senior people in banks for decades? It is no secret that many chief executives were buying their positions. One presumes the money was paid on their behalf by businessmen—who, you can bet, were favoured later with loans that would not bear scrutiny. Also, when the new government declared that there would be no more phone calls from the government to banks, the implications about past practice were clear. As it happens, the phone calls have not stopped. 

As for bank unions, who (if you are old enough to have been there in 1969) organised slogan-shouting outside every bank branch, in support of nationalization, took rallies to Indira Gandhi’s house, and then created an environment in which customers became bank captives who were subjected to the worst possible service standards, and who also (you can bet) knew every time a wrong loan was given because these things are never really secret in an organization, what is their accountability? Why weren’t they whistle-blowers? 

In short, there are no innocents here. So what is to be done? The easy option is to take more of your tax money and give it to the same banks, on a platter. The government has talked of giving them another Rs 2.4 lakh crore—which works out to Rs 10,000 from every family, rich and poor. Is this money down a drain? After all, all government banks put together are now valued at no more than the new capital injection that has been proposed. Which brings up Option 2: transfer all bad banking assets into a “bad bank” which then deals with the difficult cases. The problem is that this gives a free run to banks manned by the incompetent or the corrupt, who can go ahead and build a new lot of bad assets. 

A third option would be to ask banks to go and raise money from the market; but many banks command stock market valuations that are less than what they are writing off in a quarter, so that is no solution. Finally, the RBI governor asks for surgery—but ownership change is beyond his brief, and no one in the government wants to go down that road. Since there is no fifth option, we will go back to the one that is easiest to do: take more of the taxpayer’s money and give it to the banks, while businessmen become NRIs (you can guess what that means). So should you be angry or not? 

ALSO READ: 5 things you need to know about bank write-offs